Overview of capital market

CS (Dr) Rajeev Babel, ACS, MBA, Ph.D, LLB, AIIB, M.COM,

Dip in Corporate Governance,

DBM, DFS, D T&D,

Company Secretary in Practice,

UDAIPUR

Email: [email protected]

mailto:[email protected]

A financial system is a set of institutional arrangements through which financial surpluses are mobilised from the units generating surplus income and transferring them to the others in need of them.

The activities include production, distribution, exchange and holding of financial assets/instruments of different kinds by financial institutions, banks and other intermediaries of the market.

In a nutshell, financial market, financial assets, financial services and financial institutions constitute the financial system.

Monday, May 04, 2015 2 CS Rajeev Babel, Mail id: [email protected]

Various factors influence the capital market

and its growth. These include:

Level of savings in the household sector,

Taxation levels,

Health of economy,

Corporate performance,

Industrial trends, and

Common patterns of living.


The strength of the economy is calibrated by different economic indicators like:

Growth in GDP (Gross Domestic Product),

Agricultural production,

Quantum and spread of rain fall,

Interest rates,

Inflation,

Position on balance of payments and balance of trade,

Levels of foreign exchange reserves and

Investments and growth in capital formation.


Regulation of currency

Banking functions

Performance of agency services and custody of cash reserves

Management of national reserves of international currency

Credit control

Administering national, fiscal and monetary policy to ensure stability of the economy

Supply and deployment of funds for productive use

Maintaining liquidity.


Long term growth of financial system is

ensured through:

Education of investors

Giving autonomy to FIs to become efficient

under competition

Consolidation through mergers

Facilitating entry of new institutions to add

depth to the market

Minimising regulatory measures and market

segmentation


Financial Markets

Products

Market Participants


Financial Market

Capital Market

Primary market

Secondary Market

Money Market


The money market refers to the market

where borrowers and lenders exchange short-

term funds to solve their liquidity needs.

Money market instruments are generally

financial claims that have low default risk,

maturities under one year and high

marketability.


The Capital Market is a market for financial

investments that are direct or indirect claims

to capital. It is wider than the Securities

Market and embraces all forms of lending

and borrowing, whether or not evidenced by

the creation of a negotiable financial

instrument.


Capital market plays an extremely important role in promoting and sustaining the growth of an economy.

It mobilizes funds to enterprises, both private and government.

It is a effective source of investment in the economy.

It plays a critical role in mobilizing savings for investment in productive assets, with a view to enhancing a country’s long-term growth prospects. n addition to resource allocation, capital markets also provide a medium for risk management by allowing the diversification of risk in the economy.


A well-functioning capital market tends to improve information quality.

It plays a major role in encouraging the adoption of stronger corporate governance principles, thus supporting a trading environment, which is founded on integrity.

It plays a crucial role in supporting periods of technological progress and economic development throughout history.

Liquid markets make it possible to obtain financing for capital-intensive projects with long gestation periods. This certainly held true during the industrial revolution in the 18th century and continues to apply even as we move towards the so-called “New Economy”.

Capital markets make it possible for companies to give shares to their employees via ESOPs


Capital markets provide a currency for acquisitions via share swaps.

Capital markets provide an excellent route for disinvestments to take place.

Venture Capital and Private Equity funds investing in unlisted companies get an exit option when the company gets listed on the capital markets

The existence of deep and broad capital market is absolutely crucial in spurring the growth our country.

Capital market provides alternative sources of funding for companies and in doing so, achieve more effective mobilisation of investors’ savings.

Capital market also provides a valuable source of external finance.


To mobilize resources for investments.

To facilitate buying and selling of securities.

To facilitate the process of efficient price

discovery


The Securities Market, refers to the markets

for those financial instruments/ claims/

obligations that are commonly and readily

transferable by sale.

The Securities Market has two inter-

dependent and inseparable segments, the

new issues (primary) market and the stock

(secondary) market


The primary market provides the channel for

sale of new securities, while the secondary

market deals in securities previously issued.

The issuer of securities sells the securities in

the primary market to raise funds for

investment and/or to discharge some

obligation


The secondary market enables those who

hold securities to adjust their holdings in

response to changes in their assessment of

risk and return. They also sell securities for

cash to meet their liquidity needs. The price

signals, which subsume all information about

the issuer and his business including,

associated risk, generated in the secondary

market, help the primary market in

allocation of funds.


This secondary market has further two

components:

First, the spot market where securities are

traded for immediate delivery and payment,

The other is futures market where the

securities are traded for future delivery and

payment.


Another variant is the options market where

securities are traded for conditional future

delivery. Generally, two types of options are

traded in the options market.

A put option permits the owner to sell a

security to the writer of the option at a pre-

determined price before a certain date,

A call option permits the buyer to purchase a

security from the writer of the option at a

particular price before a certain date.


“securities” which is defined in the

Securities Contracts (Regulation) Act, 1956 to

include:

shares, stocks, bonds, debentures,

debenture stock, or other marketable

securities of like nature, government

securities, derivatives of securities, units of

collective investment scheme, security

receipts, interest and rights in securities, or

any other instruments so declared by the

central government.


The securities market, has essentially three

categories of participants:

the issuers of securities,

investors in securities and

the intermediaries


The Securities Market provides a linkage

between the savings and the investment

across the entities, time and space. It

mobilises savings and channelizes them

through securities into preferred enterprises.

It is a link between investment & savings

Mobilises & channelizes savings

Provides Liquidity to investors

Is a market place for purchase and sale of

securities


The securities market fosters economic

growth to the extent that it:

Augments the quantities of real savings and

capital formation from any given level of

national income,

Increases net capital inflow from abroad,

Raises the productivity of investment by

improving allocation of investible funds,

Reduces the cost of capital.


The securities market facilitates the

internationalisation of an economy by linking

it with the rest of the world.

This linkage assists through the inflow of

capital in the form of portfolio investment.

Moreover, a strong domestic stock market

performance forms the basis for well

performing domestic corporate to raise

capital in the international market.


The SEBI Act, 1992 which establishes SEBI to protect investors and develop and regulate securities market.

The Securities Contracts (Regulation) Act, 1956, SCRA which regulates transactions in securities through control over stock exchanges.

The Depositories Act, 1996 which provides for electronic maintenance and transfer of ownership of demat securities.

The Companies Act, 2013, which sets out the code of conduct for the corporate sector in relation to issue, allotment and transfer of securities and disclosures to be made in public issues.


Establishment of Regulator

Screen Based Trading

Risk management

Depositories Act

Derivatives

Settlement Guarantee

Securities Market Awareness

Green Shoe Option

Securities Lending and Borrowing

Corporate Governance

Debt Listing Agreement


Gold Exchange Traded Funds in India

Guidelines for Issue of Indian Depository

Receipts (IDRs)

Grading of Initial Public offerings (IPOs)

Introduction of Fast Track Issuances

Mandatory Requirement of Permanent

Account Number

Corporate Debt Market

Setting up of SME Exchange

Business Responsibility Reports


The International Organization of Securities

Commissions (IOSCO)

Created in 1983 to change from an inter-

American regional association (created in

1974) into a global cooperative body.

In 1984, securities regulators from France,

Indonesia, Korea and the United Kingdom

were the first agencies to join the

organization from outside the Americas.


There are three objectives of securities

regulation –

Protecting investors;

Ensuring that markets are fair, efficient and

transparent;

Reducing systemic risk.


The three categories are:

– Ordinary;

– Associate; and

– Affiliate.


This category is open to a securities

commission, or a similar government or

statutory regulatory body that has primary

responsibility for securities regulation in its

jurisdiction.

Ordinary members each have one vote in the

Presidents Committee, which meets yearly at

the Annual Conference


The following bodies can apply to become associate members of the organization:

A public regulatory body with jurisdiction in the subdivisions of a jurisdiction if the national regulatory body is already an ordinary member; and

Any other eligible body with an appropriate responsibility for securities regulation.

A self regulatory body is not eligible for associate membership.

Associate members do not have the right to vote and are also precluded from membership of the IOSCO Board; however they are members of the Presidents Committee.


A self-regulatory body (SRO), or an

international body, with an appropriate

interest in securities regulation is eligible for

this category of membership.

Affiliate members do not have a vote, are

not eligible for the IOSCO Board and are not

members of the Presidents Committee. SROs

affiliate members form the SRO Consultative

Committee.


MMOU: MULTILATERAL MEMORANDUM OF

UNDERSTANDING CONCERNING

CONSULTATION AND CO-OPERATION AND

EXCHANGE OF INFORMATION

The MMoU represents a common

understanding amongst its signatories about

how they will consult, cooperate, and

exchange information for securities

regulatory enforcement purposes.


1. Multi-Depository System: NSDL and CDSL

2. Depository services through depository

participants

3. Dematerialisation

4. Fungibility

5. Registered Owner/ Beneficial Owner

6. Free Transferability of shares


Multi-Depository System: The depository model adopted in India provides for a competitive multi-depository system. There can be various entities providing depository services. A depository should be a company formed under the Company Act, 1956/2013 and should have been granted a certificate of registration under the Securities and Exchange Board of India Act, 1992. Presently, there are two depositories registered with SEBI, namely:

National Securities Depository Limited (NSDL), and

Central Depository Service Limited (CDSL)

Monday, May 04, 2015 CS Rajeev Babel, Mail id: [email protected] 36

Depository services through depository

participants: The depositories can provide

their services to investors through their

agents called depository participants. These

agents are appointed subject to the

conditions prescribed under Securities and

Exchange Board of India (Depositories and

Participants) Regulations, 1996 and other

applicable conditions.


Dematerialisation: The model adopted in

India provides for dematerialisation of

securities. This is a significant step in the

direction of achieving a completely paper-

free securities market. Dematerialization is a

process by which physical certificates of an

investor are converted into electronic form

and credited to the account of the

depository participant.


Fungibility: The securities held in

dematerialized form do not bear any notable

feature like distinctive number, folio number

or certificate number. Once shares get

dematerialized, they lose their identity in

terms of share certificate, distinctive

numbers and folio numbers. Thus all

securities in the same class are identical and

interchangeable. For example, all equity

shares in the class of fully paid up shares are

interchangeable.


Registered Owner/ Beneficial Owner: In the depository system, the ownership of securities dematerialized is bifurcated between Registered Owner and Beneficial Owner.

‘Registered Owner’ means a depository whose name is entered as such in the register of the issuer.

A ‘Beneficial Owner’ means a person whose name is recorded as such with the depository.

Though the securities are registered in the name of the depository actually holding them, the rights, benefits and liabilities in respect of the securities held by the depository remain with the beneficial owner.

For the securities dematerialized, NSDL/CDSL is the Registered Owner in the books of the issuer; but ownership rights and liabilities rest with Beneficial Owner. All the rights, duties and liabilities underlying the security are on the beneficial owner of the security.


Free Transferability of shares: Transfer of

shares held in dematerialized form takes

place freely through electronic book-entry

system.

